Are Government Bonds Tax Exempt

In this article, we will discuss about Government bond and some relevant provisions. First we will discuss about a question, “ Are Government Bonds Tax Exempt ”?

Therefore, at the end of this article, we will give you a small and simple answer, by which you can come out from your queries.

GOVERNMENT BONDS: It refers to those bonds which are issued by the government. Generally, Government Bonds are risk free and their time period is 2 to 30 years. Government bond is not same as tax free bonds. It means, the exemption of tax has not been certain from investment on government bonds.

Most of the time, tax free bonds are issued by National Highway Authority of India (NHAI) and Power Finance Corporation (PFC), which are giving a strong infrastructure to India’s government. These authorities has been issuing tax free bonds for 10 year at 8.2% coupon rate and for 15 years at 8.3% coupon rate. These bonds are rated by AAA and listed in stock exchanges for trading in secondary market. Tax free bonds are exempt in capital gain and at stock market, the valuation of tax depends upon its category, ie. Long term or Short term.

However, according to experts view, government bond is much better than tax free bonds because government bond yield is 8.4% for 10 year and is at 8.6% for 15 years, therefore, we can see that Government Bonds gives higher yield at a similar maturity period. Most Government bonds are transferable like Treasury Bills, Treasury Notes and Ginnie Mae bonds.

Well, after discussing about government bond, here we are mentioning some important provisions of Government Bonds, which are significant to know about Government Bonds:

1. LOW RISK:

Government Bonds has very low Risk and the rate of Interest is also low but that does not mean that they are risk-free. Since they have low risk, investors invest their money for a long period and secure their money in Government hands.

2. DIVERSIFICATION:

Government Bonds are diversified in many forms like Treasury Bills, Municipal Bonds, Zero-Coupon Bonds and Corporate Bonds etc. If investors want to carry a huge interest with a high risk, they invest in Municipal Bonds and if they want low risk with low interest, they will carry the Treasury bonds.

3. FULLY TRANSFERABLE AND MARKETABLE:

In Nigerian stock exchange the governments bonds are fully transferable and marketable. Anyone can buy and sell to other investors who are interested in carrying out this transaction.

4. TAX- FREE INCOME:

Tax-Free Bonds are the type of Government Bond which are issued by the National Highway Authority of India (NHAI). The Tax Free Bonds are exempted from Tax and they are issued for long term period. Investor who wants to take return of 8.2% in every year for ten- years and who want return of 8.3% for 15 years, can invest in Tax-Free bonds.

Well, now we are coming in our aforesaid question, what is “Are Government Bonds tax exempt or not?”

Government Bonds, such as relief or saving bonds, are taxable with effect from 31st May, 2007. Since from 1st June, 1997, interest on Government Bonds is exempt from TDS but as per Finance Act, 2007, those Government Bonds are taxable which exceeds Rs. 10,000 amount of interest during a financial year. These taxable bonds are generally 8% saving bonds, which are taxable W.E.F. 1st June, 2007. We can also say that, TDS will not be charged upon interest payment on relief/saving bonds other than 8% saving bonds, 2003.

About the author

Prashant Sharma is a Delhi based Entrepreneur who spent most of his college days polishing his marketing skills and went for his first business venture at 19. Having tasted failure in his entrepreneurial debut, he turned a Tech-enthusiast, specializing in web technologies later. Join him on Google Plus